Macro – Inequality

Question 1

What characterizes Economic Inequality?

Answer 1

Unequal distribution of income and wealth.

Question 2

How can the Lorenz Curve measure Economic Inequality?

Answer 2

A lorenz curve diagram will display the relationship between cumulative percentage of income and population. The closest the curve is to the diagonal (representing perfect income equality) the more equal is the distribution of income.

Question 3

How can the Gini Coefficient measure Economic Inequality?

Answer 3

The gini coefficient summarises the information in the Lorenz curve with a value between 0 and 1. The closer the value is to 1 the greater the income inequality.

Question 4

How can Redistribution of Income be Represented on a Lorenz Curve?

Answer 4

Redistribution of income will cause income distribution to be more equal. Hence, the Lorenz Curve will shift closer to the diagonal.

Question 5

What are the Causes of Wealth Inequality?

Answer 5

• Limited growth in wages
• High-income people use less of their income
• Proportional to income inequality

Question 6

What is the difference between Absolute and Relative Poverty?

Answer 6

Absolute poverty refers to the situation in which an individual is not able to meet basic needs. Relative poverty refers to the situation in which an individual is not able to afford an adequate standard of goods/services relative to the society’s standards.

Question 7

What types of Indicators are used to Measure Poverty?

Answer 7

1) Single Indicators

2) Composite Indicators

Question 8

How can Single Indicators measure Poverty?

Answer 8

• International poverty lines

* Minimum income standard

Question 9

How can Composite Indicators measure Poverty?

Answer 9

Multidimensional poverty index (MPI)

Question 10

How can Single Indicators measure Poverty?

Answer 10

• International poverty lines (extreme poverty < $1.90)

* Minimum income standard (measures basket of goods needed for adequate living conditions)

Question 11

How can Composite Indicators measure Poverty?

Answer 11

The multidimensional poverty index (MPI) measures poverty through the evaluation of health, education, and living standards to produce a value between 0 and 1. The closest to 1 the greater the poverty.

Question 12

What are the Challenges of Measuring Poverty?

Answer 12

• Exclude savings
• Surveys have subjective questions
• Surveys do not include homeless people
• Understates income spent in investment
• Different areas have different prices
• Poverty lines do not show how much below people are

Question 13

What are the Causes of Poverty

Answer 13

• Inequality in opportunity
• Different levels of resource ownership
• Different levels of human capital
• Discrimination
• Unequal status and power
• Government tax and benefit policies
• Globalization
• Technological change
• Market-based supply side policies
• Firms making abnormal profit
• Increases in pay of certain jobs
• Unemployment
• Geography
• Poverty

Question 14

What is Inequality of Opportunity?

Answer 14

Inequalities in potential outcomes in standards of living that arise from circumstances that are beyond one’s control.

Question 15

What is the Impact of Inequality on Economic Growth?

Answer 15

Inequality leads to slower growth due to:
• Low spending in human capital (e.g. education)
• Inequality of opportunity in education
• Financial investments abroad (by high-income agents)
• Political control (by high-income agents)
• Less demand for locally produced goods
• Inability to obtain credit prevents investment
• Political instability and social unrest

Question 16

What is the Impact of Inequality on Standards of Living?

Answer 16

Living standards decrease, this causes:
• Lack of access to healthcare and education
• Higher infant/child/maternal mortality rate
• Higher levels of disease (lack of hygiene)
• Social problems (crime)
• Inability to fulfill potential

Question 17

What is the Impact of Inequality on Social and Political Stability?

Answer 17

Create divisions in population reducing the sense of solidarity and trust in the system. furthermore the imbalance of status and power causes political influence resulting into political inequality.

Question 18

Distinguish between Regressive, Proportional and Regressive Taxes

Answer 18

Regressive: income increases - tax decreases
Proportional: income increases - tax constant
Progressive: income increases - tax increases

Question 19

What are the different Types of Direct Taxes?

Answer 19

1) Personal Income
2) Corporate
3) Wealth
4) Payroll (paid into funds; e.g. pensions)

Question 20

Distinguish between Direct and Indirect Taxes

Answer 20

Direct taxes are directly paid to the government by the taxpayer. Indirect taxes are taxes on spending of goods and services and are paid indirectly to the government by consumers through firms.

Question 21

What is the Role of Taxation against Inequality?

Answer 21

Taxation can help to redistribute wealth and income by lowering inequalities through higher taxes on the rich and lower taxes on the poor.

Question 22

What are the different Types of Indirect Taxes?

Answer 22

1) Excise (paid on specific goods; e.g. demerit goods)
2) Sales (spending on goods and services)
3) Tariffs (value paid on imports)

Question 23

What are the Effects of Different Types of Taxes on Inequality?

Answer 23

Progressive taxes will decrease inequality making the post-tax distribution of income more equal than the pre-tax. Regressive taxes will obtain the opposite.

Question 24

What is the Marginal Tax Rate?

Answer 24

The tax rate paid on additional income, or on the last amount of tax paid, expressed as a percentage.

Question 25

What is the Average Tax Rate?

Answer 25

The tax paid divided by total income, expressed as a percentage.

Question 26

What are the Disadvantages of Taxation?

Answer 26

• Income taxes act as disincentives to work or save
• Corporate taxes act as disincentives for investment
• Wealth taxes act as disincentives for investment

Question 27

How should Taxation be Used to Promote Equality?

Answer 27

OECD recommends broad-based capital income taxes complemented by a form of wealth taxes such as the inheritance tax. Instead, the IMF recommends wealth taxes and more progressive taxation should be used in countries (this has declined recently).

Question 28

What Policies can be Used to Reduce Inequality?

Answer 28

• Transfer payments
• Targeted government spending
• Universal basic income (payment received)
• Policies to reduce discrimination
• Minimum wage and price controls